Building China's unified pension system

Beijing must pacify regional governments

by National University of Singapore authors

Thu 22 Jun 2017

China's 13th five-year plan, unveiled by the state council last year, includes policies for a unified, national pension system. These are intended to consolidate dozens of funds run by local governments into a single scheme by 2020.

The proposal aims to build a sustainable pension system to protect the country's aging population. The 220m people over the age of 60 account for 16.1% of China's total population. That figure is expected to reach 437m by 2050, nearly one-third of the total.

The government is already suffering the consequences of the absence of a comprehensive national pension system. The overall annual expenditure for the medley of regional social insurance schemes increased to Rmb3.9tn (around $600bn) in 2015 from Rmb2.3tn in 2012.

To resolve the problem, China's national council for social security fund invested part of the country's Rmb2tn of retirement savings funds in equities in 2015. Previously, investments were limited to government bonds. The council has pumped an additional Rmb360bn into financial markets since late 2016. However, the root problems of China's social security system go deeper than limited investment options, and can be attributed to two important developments in its history.

First, the liberalisation of its economy in the 1990s and 2000s saw the break-up of the Chinese state-run economic model. This system provided workers an 'iron rice bowl' by guaranteeing job security, housing, healthcare and pensions.

Second, the introduction of the one-child policy in the 1980s deprived parents of an extended support structure in their old age. Piecemeal local pension systems emerged to address the decline in the state's ability to insure workers' futures.

Unrest over social security among workers in parts of China illustrates the inadequacy of the existing structures. A strike by around 40,000 workers at a Dongguan shoe factory in 2014 was triggered by employees who were underpaid social insurance for years.

The proposed nationwide pension system attempts to address the central government's growing concerns about of a divide between the more and less affluent regions of the country. The Guangdong government reportedly earned a Rmb77bn pension surplus in 2014. By contrast, the north-eastern province of Heilongjiang had a Rmb10.6bn deficit at the end of 2014. It was one of seven regions to incur a pension deficit.

Despite the probable benefits of a nationwide single pension system, the government is likely to face resistance. Not all regional governments support the plans to migrate their pension systems into a national scheme, owing in part to the income disparities between them. It is suspected, too, that many local governments draw on their pension funds to finance other projects. And since structures of pension contributions and pay-outs differ across regions, unifying them could create several problems including determining an 'equitable pay-out to all' under a centralised scheme.

Centralisation is intended to reduce administrative costs of managing different regional pension systems. However, the arduous process of harmonisation could exacerbate the administrative burden in the short term. This imbalance is creating anxiety at the national level. The ministry of finance is concerned the system may overburden the central government with fiscal responsibilities as the population ages. These concerns are not groundless. According to figures from the ministry, 12% of the total social insurance funds collected in 2014 came from government transfers, reflecting the fiscal strain which a national plan could pose.

There will be problems from resistance by local governments and concerns among central agencies. Much will depend on how much political capital the central government is willing to expend.

This is an edited version of an article that first appeared on Global-is-Asian, the digital platform of the Lee Kuan Yew School of Public Policy, and reproduced here with the permission of the National University of Singapore.